Question: A two-year old Denver based startup has 30 million common shares, all of which are owned by the founder. The founder is considering the following

A two-year old Denver based startup has 30 million common shares, all of which are owned by the founder. The founder is considering the following two offers :

Offer A : A VC firm is offering a $10 million investment. In exchange the VC will receive 15 million convertible preferred shares (non-participating) with a 1x liquidation preference.

Offer B : A competitor is offering to buy the startup for $20 million in cash today.

If she takes offer A, the founder believes that there is a 25% chance that she will be able to take the startup public via an IPO at a $120 million valuation in 3 years, and a 75% chance that she will sell the startup for $12 million also in 3 years. The founder believes that she will not need to raise any additional capital during these 3 years.

a) Which offer values the startup more highly today ? Offer A or Offer B?
b) Which offer should the founder accept if she is only concerned about maximizing her financial return? Why?

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